Home / Front Page/ Central Bank rate cut “inevitable”

Central Bank rate cut “inevitable”


Comments / {{hitsCtrl.values.hits}} Views / Wednesday, 29 May 2019 01:46


 

  • First Capital Research says probability rate at 95% 
  • Sluggish growth, Easter Sunday attacks, improved macro fundamentals seen as key reasons 
  • Rate cut also likely given alarming deceleration of private sector credit 
  • Predicts economic recovery will take at least one year, downgrades growth to less than 3%  

First Capital Research yesterday said there is a 95% probability for a policy rate cut when the Central Bank announces its latest monetary policy stance on Friday. 

Releasing its policy expectations, First Capital said a rate cut was “inevitable,” given slowing growth and the impact of the Easter Sunday attacks.  

“We are of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth. Despite the Road Map towards a single policy rate, we believe a rate cut in both SLFR and SDFR is more appropriate, considering the severity of the situation. However, in the case of a 75bps or a 100bps rate cut consideration, though remote, Central Bank may consider a lower cut for SDFR,” the report said. 

First Capital Research pointed out that the Monetary Board had previously observed that the continuation of the monetary policy stance was appropriate but had hinted at possible monetary easing. This has since been reinforced by statements from the Government calling for banks to reduce interest rates. 

Macroeconomic fundamentals have also steadily improved creating space for a policy rate cut. 

The Central Bank maintaining foreign reserve position above $7.0 billion ($7.2 billion by end April 2019) is noteworthy considering the major outflows in April 2019. The International Monetary Fund (IMF) approved the 6th tranche of $164.1 million while granting a one year extension until June 2020, providing a cushion to country’s economy to recover from the recent attacks, pointed out First Capital Research. 

“Falling below the Central Bank credit growth projection of 13.5%, private sector credit growth decelerated at an alarming rate to record an YTD growth of 0.5% during the first quarter leading to a contraction in financial sector asset base,” it added. 

The Sri Lankan rupee continued to strengthen to close at 176.24 on 22 May, supported by foreign remittance conversions and foreign inflows during the festive seasons. However, REER continued to remain undervalued at 94.74 in March 2019.

A sustained positive liquidity position was created after the lapse of six months resulting from multiple Statutory Reserve Ratio (SRR) cuts and the Government making long delayed payments, providing the ability for the Central Bank to discontinue daily reverse repo auctions and term reverse repo auctions.

“The Easter Sunday attacks are expected to have a detrimental impact on the economy, possibly further slowing down the sluggish economy. We expect the recovery would require at least one year period forcing a downward revision to our 2019 GDP growth projection to below 3% from previous 4.3%.” 


Share This Article

Facebook Twitter


DISCLAIMER:

1. All comments will be moderated by the Daily FT Web Editor.

2. Comments that are abusive, obscene, incendiary, defamatory or irrelevant will not be published.

3. We may remove hyperlinks within comments.

4. Kindly use a genuine email ID and provide your name.

5. Spamming the comments section under different user names may result in being blacklisted.

COMMENTS

Today's Columnists

Diplomatic drone strike, Indo-Lanka equation and constitutional change

Thursday, 20 February 2020

The ‘diplomatic drone strike’, the dramatic US strictures against the Army Commander, Lt. Gen. Shavendra Silva, tells us that Big Brother IS watching. This isn’t the usual suspects, its way out of their league. This is the Big League, the big b


Solar and wind power can resolve electricity crisis, early and cheaper, if allowed

Thursday, 20 February 2020

The country is facing the worst power situation in the history, with electricity generation being unable to meet the demand, with generation costs among the most expensive in the world. With the current scenario, the country cannot be expected to com


Sri Lanka: A great ocean polluter with plastics? No, we are not!

Thursday, 20 February 2020

I was going through the corridors of an impressive State training facility in the heart of Colombo and witnessed the message on each floor as you await the lift that Sri Lanka is the fifth largest marine polluter with respect to single use plastics!


Future of higher education and challenges for public universities in Sri Lanka

Thursday, 20 February 2020

We are constantly told that the workplace or private spaces of the future will be radically changed due to rapid technological changes, but the only certainty about this future is its uncertainty. How do we face such an uncertain future? The consensu


Columnists More